17/03/2010 TRENDS IN EQUITY DERIVATIVES AND STRUCTURED PRODUCTS Christophe Mianné, Head of SG CIB Global Markets
Disclaimer The following presentation contains a number of forward-looking statements relating to Societe Generale s targets and strategy. These forecasts are based on a series of assumptions, both general and specific. As a result, there is a risk that these projections will w not be met. Readers are therefore advised not to rely on these figures more than is justified as the Group s s future results are liable to be affected by a number of factors and may therefore differ from current estimates. s. Readers should take into account elements of uncertainty and risk when basing their investment decisions on information provided in this presentation. Neither Societe Generale nor its representatives shall have any liability whatsoever for any loss arising from any use of this presentation or its contents or otherwise arising in connection nection with this presentation or any other information or material discussed. The Group's consolidated income statements were approved by the Board of Directors on February 17th 2010. The consolidated income statements for the fourth quarter 2009 and a the full year 2009, as well as the comparative information for r the fourth quarter 2008 thus produced, have undergone a review by the e Statutory Auditors. The figures provided for the financial year ended December 31st 2009 and the comparative information for 2008 have been prepared in accordance with IFRS (International Financial Reporting Standards) as adopted by the European Union and applicable at these dates. The consolidated financial statements have undergone a review by the Statutory Auditors. Unless otherwise specified, the sources for the business rankings s are internal. 2
What Has Changed Since 2006? Lessons From the crisis Looking Forward: Still a Growing Business? Conclusion
WHAT HAS CHANGED SINCE 2006? What has happened since 2006 in the competitive landscape? 2008 was an earthquake in the Equity Derivatives industry Equity Derivatives leaders are still here Société Générale Goldman Sachs JP Morgan Credit Suisse Deutsche Bank BNP Barcap Morgan Stanley > EUR 3bn EUR [1-3] bn Estimated pure EQD 09 NBI (i.e. excl. Prime Brokerage and Cash Equity) Many banks have disappeared or reduced their ambitions ABN Amro Lehman Brothers BBVA Merrill Lynch Bear Stearns Santander Crédit Agricole UBS Commerzbank Dresdner Source: Analysts estimates 4
WHAT HAS CHANGED SINCE 2006? 35 30 25 20 15 10 The EQD world has experienced exceptional market conditions MSCI Volatility VIX 70 60 50 40 30 20 % 5 10 Post-war average: 18.1 0 91 92 93 94 95 96 97 98 99 02 03 04 05 06 07 08 09 10 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Daily variations of Eurostoxx 50 Implied Dividends 40 200 Days 35 30 25 20 15 10 5 0 6 3 9 1 25 1 1 20 3 12 12 13 1 7 4 1 1 3 3 2 3 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 +/- [3% ; 5%] +/- [5% ; 7%] > +/ - 7% 180 160 140 120 100 Implied Divs EStoxx50 2009 Implied Divs EStoxx50 2010 Implied Divs EStoxx50 2014 Implied Divs EStoxx50 2019-35% between 1st October and lowest of October -35% between 1st October and lowest of October 80 Jan 08 Mar 08 May 08 Jul 08 Sep 08 Nov 08 5
How did we handle the 2008 crisis? WHAT HAS CHANGED SINCE 2006? SG was well-armed to weather the storm for its clients and for itself 1 push of ART deals to transfer unwanted risks (reduction of our exposure on dividends and correlation) a strong capacity to manage market risks: anticipation of market dislocation conservative management of VarSwap positions (between Jan 08 and LB s bankruptcy, we had divided by 5 our exposure of VarSwaps) These prudent positions allowed us to be one of the very few market makers available 24/24 in Oct. and Nov. to post contained losses in Q4-08 compared to our peers 2 Q4-08 Restated Equity NBI, in EUR Bn 1 0-1 -2 GS MS JPM UBS SG CITI CS BNPP DB Focused on Flow and Cash activities Losses on Exotic positions & Prop Trading 1 ART: Alternative Risk Transfer 6
How have we handled the Fraud Recovery? Looking beyond to improve our risk management Strong Client Loyalty Key assets : strong staff and client loyalty reflected in continued market and client recognition, sound trading books coupled with conservative risk management An ambitious Fighting Back program to regain confidence Reinforce limits set-up Improve IT security Change our practices Enhance operational controls Worldwide implementation EUR 150m Budget 300 dedicated employees 3 Years plan Global Consulting & Audit Plan Looking forward: a strong willingness to become a best-in-class and to further mitigate operational risk Continuation of Fighting Back within the C.O.S.I project, launched in June 2009 Set highest level of standards on key operational risk hotspots Improve P&L production and explanation Improve business continuity capability Ensure highest standards in terms of internal control LESSONS FROM THE CRISIS 100 98 Top 100 clients in 2007 2008 Control of significant size transaction Control on nominal and futures positions Confirmation & monitoring of deferred transactions Confirmation of internal/ intercos deals Control of amend & cancellations Control of brokerage fees Holiday monitoring Margin calls/futures monitoring Control of technical counterparties Control of out of market price transactions Control of large payments Control of cash levels Control of non-transactional flows Control of nostri accounts Control of unsettled securities loans / borrowings Control of delayed data entry Control of buffer bases 7
LESSONS FROM THE CRISIS After the storm, towards a new financial world FOLLOWING 2008 CRISIS while several players disappeared or closed some activities Lehman Brothers, Merrill Lynch, Bear Stearns, Dresdner, ABN Amro others made choices to reshape their Equity business - Focus on Flow activities (Morgan Stanley, JP Morgan) - Closing of Proprietary Trading activities (Morgan Stanley, UBS) SG made the choice of a Balanced business between Flow & Structured Products while containing Proprietary Trading activities and implementing a global markets organization This enabled SG to post a strong performance in 2009 Equity Derivatives - NBI EUR m Distribution of Daily Revenues 2009 Awards 1 000 800 600 400 200 0 Q1-09 Q2-09 Q3-09 Q4-09 Business Days 200 180 160 140 120 100 80 60 40 20 0 2009 2008 <-30-30 to 0 0 to 30 30 to 60 >60 Equity Derivatives House of the Year by Risk Most Innovative in Equity Derivatives by The Banker Best Equity Derivatives House by Euromoney EUR m 8
LESSONS FROM THE CRISIS A new organization Global Markets Client Management Unit Client activities Treasury Trading Global Equity Flow Fixed Income & Currencies Solutions Commodities Global Research Lyxor Proprietary trading Dedicated Trading Dedicated Trading Dedicating Trading Dedicated Trading Americas Asia-Pacific Optimization of Risk Management Cross assets approach on Structured Products, Research, PT activities EXPECTED BENEFITS Specific management of Proprietary Trading activities Global research Optimization of consumption of Scarce Resources Share of best practices on sales side Optimization of Operations and IT processes 9
LESSONS FROM THE CRISIS Improve the risk profile and change the way we manage risks Equity Trading VaR (EUR m) 46 35 25 19 23 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 One of the best ratio NBI/Var of the industry 108 124 88 53 99 46 2007 2008 2009 SocGen Competition Universe 1 Equity stress test (EUR m) SG Trading VaR vs peers 727 578 445 496 428 Q4-08 Q1-09 Q2-09 Q3-09 Q4-09 JPM Citi A new risk monitoring approach Dislocation analysis Avoid Concentration risks Take Liquidity into account Q4-08 SG : Q4-09 Peers : latest publication GS DB BoA BNPP CS NMR UBS CACIB MS SG SAN NATX Commerz 1 Credit Suisse, UBS, Deustche Bank, Goldman Sachs, Morgan Stanley, JP Morgan, Citigroup, BNPP 10
A well-balanced business model is key for the future LOOKING FORWARD : STILL A GROWING Global Markets 2009 Revenues breakdown Fixed Income, Currencies and Commodities EUR 7.2bn 54% 46% Equity Developed Flow activities #2 in dividend futures & index futures on Eurex #1 in warrants worldwide #2 ETF provider in Europe in 2009 with 20.8% Market Share in AuM, #4 largest ETF issuer worldwide Amer by business Asia 8% Strong Structured activities Franchise as strong as ever Distribution and Institutions Equity and Fund derivatives Within a global cross-asset entity 16% 76% by geography Europe Limited Trading Mostly in relation to clients trades Liquid assets No directional position Limited contribution of Prop trading to SGCIB revenues 11
LOOKING FORWARD : STILL A GROWING Focus on Flow Products - We are well positioned on markets that are growing profitably ETF & WARRANTS: ambition to double the ETF business while maintaining our leadership on warrants 35 30 25 20 15 10 5 0 AuM Lyxor ETF EUR bn 38% 29% 6% 68% 65% 2004 2005 2006 2007 2008 2009 SG is the global leader on Warrants with 13.9% Market Share SG is the second largest ETF provider in Europe in 2009 with: 20.8% Market Share -in AUM 30.14% Market Share - in average daily traded volume and the 4th largest ETF issuer worldwide (after BlackRock, State Street & Vanguard) ONE DELTA: target to benefit from the large worldwide untapped potential (ELS, Dividend Swap, Certificate, ) FLOW: ambition to maintain our volatility stronghold in Europe, develop Institutional clients coverage and become a major counterpart for Corporate clients in Europe Expand our franchise in the AMERICAS where we are a niche player on a very large market Develop our footprint in ASIA #1 Overall Equity #1 OTC Single-Stock Equity Options #1 Equity Index Options >30% #1Overall Equity #1 OTC single stock equity products #1 Equity index options #1 Warrants 2008 2009 EQD Flow revenues 12
Lyxor: an active contributor to growth and innovation LOOKING FORWARD : STILL A GROWING A Unique Specialist Focus on specific high growth segments Pioneer and leader in our areas of expertise Recognized for overall quality and innovation Lyxor is a tool box for other SG CIB Business Lines Formula funds Structured Products on Hedge Funds ETFs Index Management Quantitative & Structured Management Alternative Investments 61.0 0.1 0.7 4 10.3 18.1 28.5 43.4 51.7 23% 28% 49% Lyxor Total Assets under Management (EUR bn) 72.6 60.6 98 99 00 01 02 03 04 05 06 07 08 09 86.3 Source: Lyxor, December 31st, 2009 Managed Accounts platform: a significant rebound after 2008 crisis thanks to Lyxor s platform key benefits: Full Segregation of Assets Independent Valuation Independent Risk Management Enhanced Transparency & Reporting Enhanced Liquidity 8 7 6 5 4 3 2 1 +89% 0 DEC 08 DEC 09 Lyxor Managed Accounts Platform AuM (EUR bn) 13
SET is the Corporate Equity Derivatives desk of SG Global Markets LOOKING FORWARD : STILL A GROWING Focus on structured products: Strategic Equity Transactions Products Shareholding management (strategic stakes or treasury shares) M&A related transactions and special situations PACEO Employees saving plans and leveraged ESOP Targeted clients -Corporates - Corporate centers of financial institutions - Private Equity Funds Geographic Scope: Europe and EEMEA Very good resilience in 2008 a cautious risk management: limited concentration of risk while taking benefit of selected market opportunities And best year ever in 2009 NBI evolution +95% +51% +56% -11% 2005 2006 2007 2008 2009 14
Focus on structured products: distribution products Volumes (Eur bn) 300 250 200 150 100 50 Volumes Equity (Eur bn) SG Retail Sales revenues (basis 100) 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source structuredretailproducts.com 2010: SG estimate LOOKING FORWARD : STILL A GROWING SG margins increase in 2009 offset lower volumes The competition on prices has not come back (bp per annum) Retail Business still exists and SG is well positioned on this business with a strong franchise We deal with new distributors and new regions: Eastern Europe, Chile, Malaysia, Our range of products evolved in 2009 Simpler structures With credit risk a major focus Matching expectations in an uncertain environment 2010 products will take full advantage of the new trend set in 2009 35 30 25 20 15 10 5 0 Jan 08 May 08 Sep 08 May 09 Jan 09 Sep 09 Margins on tender offer on Retail Products 15
Focus on structured products: distribution products 1st EXAMPLE: deal with SG network LOOKING FORWARD : STILL A GROWING LUMINEO Lumineo 4-8 Years if DJ Stoxx50E >= initial value at the end of the 4th year, possibility of anticipated reimbursement >> 124% of net invested capital otherwise, at the end of the 8th year >> 100% of net invested capital + 100% of index performance (excl. dividends) The investors are looking for simplicity and clarity, on top of security...... but performance also through short term investments Our solution A simple product ensuring a total visibility: guaranteed capital at maturity with reimbursement based on an equity index: DJ Stoxx50E with anticipated reimbursement in case of moderated market increase Results The strategy was implemented in a very difficult environment A high level of fundraising (around EUR 1 Bn) The strategy has been declined in other networks 16
Focus on structured products: distribution products 2nd EXAMPLE: deal with Italian Life Insurance Company LOOKING FORWARD : STILL A GROWING POSTE VITA Collateralized Warrant 7 Years The final payoff is 100% capital guaranteed by Italian governement bonds with 3 fixed coupons (also guaranteed by Italian governement bonds) plus the warrant payoff (the warrant payoff is a call ATM on the STOXX50E) The investors are looking for payoff simplicity transparency and Compliance with local regulations in terms of Credit and Counterparty Risks Our solution A warrant coupled with Italian BTPs A warrant collateralized by Italian govies, guaranteeing capital at maturity with a Call ATM payoff profile Results A life-insurance wrapper providing an option component with no counterparty risk using a warrant collateralized by Italian Government bonds EUR 800 m raised 17
Focus on structured products: Institutional Clients At least 50% of sales revenues with Institutional Clients Balanced between all categories Sovereign funds and Family Offices Pension Funds Banks Insurances Hedge Funds Asset Managers SG has developed a broad range of solution toward Institutional clients Family Offices and Sovereign Funds Get the feel of private advisory with the sophistication of institutional solutions SG has developed a broad range of cross asset investment, financing and hedging solutions, with a tailor-made approach Pension Funds Develop strategic solutions that comply with best accounting, regulatory and risk management practices Banks Managing Bank s resources scarcity in an evolving environment LOOKING FORWARD : STILL A GROWING 18
Institutional Business: European Pension Fund looking to hedge its funding ratio in a cost-efficient manner The investors are looking for LOOKING FORWARD : STILL A GROWING Pension Fund had a high funding ratio in 2007, and wanted to protect it against a fall in interest rates......while taking into account the performance of its equity portfolio The Pension Fund wanted to implement the strategy in a very short period of time, without modifying its asset allocation A cost-efficient solution Our solution Société Générale suggested an overlay hedge No need to modify the asset allocation Hybrid solution with exposure to both interest rates and equity Global hedge providing efficient protection of the funding ratio Reduces the cost of protection as over-hedging is avoided: If equity and rates fall at the same time, more hedging is required Conversely, an equity/rate increase can compensate for an interest rate/equity decline Results The strategy was implemented in a very short period of time, for a large notional Very efficient hedge for the Pension Fund The funding ratio stayed at high levels (above 100%) in 2008 and 2009 19
LOOKING FORWARD : STILL A GROWING Focus on Regions - AMER FLOW: offer a growing range of services and products Expand our advisory services (US Research, Trading Ideas) and our execution capabilities (Futures, Direct Market Access, Flow Derivatives footprint) to compliment our existing areas of expertise. Strengths Top EU Cash capabilities Complex Flow Opportunities Growth with large wallet Asset Managers US Cash & Research (targeted sectors) OCC Equity Options Volumes* 3 500 3 000 2 500 2 000 Dispersion Correlation Index Futures ETF & Options on ETF 1 500 1 000 500 Variance 73 76 79 82 85 88 91 94 97 00 03 06 0 09 Options on Volatility (#1 in VIX Options) STRUCTURED PRODUCTS: SG is equipped to address today's needs of the US market Recent surveys have ranked SG as the #1 provider in terms of the quality of our Structured Products in the US (source Greenwich). Now, we need to expand our presence. Strengths Balance Sheet Lyxor Managed Account Platform European Expertise Quality of execution capabilities Opportunities More clients and growth with large wallet Asset Managers Increased distribution Emerging range of products Expansion in Latam America * Annual volumes in number (million) of equity options traded on the different exchanges cleared by the Options Clearing Corporation 20
LOOKING FORWARD : STILL A GROWING Focus on Regions - ASIA FLOW: develop our footprint with a focus on local clients 9 ETFs: focus on higher margin and localized products 9 Warrants: develop a new type of products and expand to other Asian markets 9 In Equity & Equity Derivatives, we have been historically focused on distribution business Retail networks Private Banks & Structured Flows 9 There is growth potential on Institutional Clients: develop our franchise Private Banks: become a key visible player Retail segment: regain a strong foot-print when the Retail segment will reopen (Taiwan, HK, Singapore) Equity Derivatives House of the Year by AsiaRisk in 2009 Asia-Pac institutions Insurers, Banks, Pensions - Premiums/Assets/AUM USD bn EQUITY DERIVATIVES CONFERENCE 17/03/2010 Source: (Banks) The Asia Banker (Jan 2009), (Pension Funds) Watson Wyatt WW/P&I 300 Analysis 2008, (Insurers) Swiss Re, Sigma #3/2009 World Insurance in 2008 STRUCTURED PRODUCTS: develop an institutional franchise and regain a strong footprint on the retail segment 21
Can regulation hurt the EQD universe? LOOKING FORWARD : STILL A GROWING Main issues Draft proposals Impact on SG CIB Equity Derivatives business Capital requirements Liquidity requirements Derivatives standardization Leverage ratio Increased capital requirements for market risk Liquidity Coverage Ratio Net Stable Funding Ratio Incentives for central clearing and on-exchange trading of standardized derivatives Increasing transparency of OTC derivatives SG CIB has already reduced its risk profile SG CIB has already deleveraged (cash assets down by 38% vs. Q2-07 at end 2009) Optimization of the use of scarce resources Increased usage of central clearing EQD flow products have typically shorter maturities than credit or rates derivatives Structured EMTN issues represent a reasonable portion of SG long term funding Reduced operational risk High-volume products already standardized and transparent via listed derivatives ETD and OTC are already co-existing For structured products the issue is suitability not transparency Volcker rules No proprietary trading operations unrelated to serving customers No holding or investment into Private Equity / Hedge funds Pure Proprietary Trading represents a limited contribution to revenues Investments into HFs are very limited No investment into PE funds We believe European regulators support the universal bank model Regulatory changes are manageable for industry s best-in-class players 22
CONCLUSION Conclusive thoughts EQD industry experienced its biggest challenge with the earthquake of Q4 2008 SG demonstrated its resilience to unusual market conditions and came out stronger We drew lessons from the crisis Risk Management is everything Balanced Business Mix Additional Value Creation with the set up of the Global Markets division Regulation is a question mark ; but it should not affect significantly our revenues There is still room for growth Structured Products Listed products Lyxor Regional action plans 23